| The addition of principal to a fund over a period of time as the result of a plan of accumulation. Similar to amortization, except that accretion results in an increase of accounting worth, while amortization results in a decrease. In portfolio accounting, discount bonds are accreted to par while premium bonds are amortized to par. |
| A bond that accrues interest which is added to the remaining principal and paid to the investor at maturity as opposed to periodically, over the term of the bond. |
| Interest accumulated on a fixed income security from its issue date or its last interest payment date up to but not including the settlement date of a purchase or sale transaction. The buyer pays the seller the market price of the bond plus accrued interest. Also refers to interest earned but not yet received on a fixed income security. |
| The actual/360 day-count method is used mainly for money-market securities: medium-term CDs, short-term CDs, and floating-rate notes (with the exception of mortgage products). The U.S. Treasury bill dollar discount is also calculated using this method. (When calculating a fraction of the normal coupon period, the actual number of calendar days in the interest period is used as the number of days for which interest is paid. The denominator is 360 (12 months of 30 days each). |
| The actual/365 day-count method is used primarily to calculate Treasury bond equivalent yields for U.S. Treasury bills, but also may be used to calculate foreign government bonds and floating-rate notes. (When calculating a fraction of the normal coupon period, the actual number of calendar days in the interest period is used as the number of days for which interest is paid, and 365 is used as the denominator). |
| Mortgage agreement between a financial institution and a real estate buyer stipulating predetermined adjustments of the interest rate at specified intervals, usually one, three, or five years. Payments are tied to some index outside the control of the bank or savings and loan institution, such as the interest rates on U.S. Treasury bills or the average national mortgage rate. Borrowers get lower rates at the beginning of the ARM than they would if they took out a fixed rate mortgage covering the same term. |
| The simultaneous purchase of one security and sale of another security at prices which are above current market values. This type of transaction is used to prevent realizing a loss on the security which is sold. Adjusted trading is not permissible for credit unions. |
| The debt of an agency (or frequently, government sponsored enterprises) of the U.S. Government. Payment of principal and interest are sometimes guaranteed by the government itself. |
| An individual authorized by a principal to execute orders for or act on behalf of that principal. The principal may pay the agent a fee or commission. |
| The reduction of debt through regular payments of principal which pay off a loan by its maturity date. |
| The day most of the terms of the bond are made public such as the issue size and maturity date. |
| The total return of a security over a specified period, expressed as an annual rate of interest. |
| A figure (as in a percentage) calculated by a formula to find the "average" performance per year for a period greater than one year. |
| Technically, the purchase of a security in one market and the simultaneous sale of it or its equivalent in the same market or other markets for the differential or spread prevailing, at least temporarily, because of conditions peculiar to each market. Commonly refers to a swap done between two similar issues based upon an anticipated change in price spreads. |
| Adjusted Rate Mortgage |
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| The price at which securities are offered to a potential buyer; the price sellers offer to take. |
| Price at which a security is offered for sale on an exchange. Also called the ask price, asking price, or offering price. |
| A security collateralized by loans, leases, unsecured receivables, or installment loans on personal property such as computers, automobiles or credit cards. |
| Financial institutions perform asset-liability management when they structure the term and repricing of their deposits against the interest rate risk exposure of their loan commitments or investments. This provides protection from the potentially adverse effects of rapid changes in interest rates. |
| To sign a document transferring ownership from one party to another. Registered bonds can be assigned by completing a form printed on the back of the certificate. For safety reasons, the completion of an "assignment separate from certificate" or "bond power" is preferred. |
| In connection with a buy order, it means to purchase at the price specified or under; in a sell order, to sell at the price specified above. |
| Process through which securities are sold to investors at initial issuance. Original issue Treasury securities are sold through this system using competitive bidding. |
| Accounting classification under Statement of Financial Accounting Standards (SFAS) 115, Accounting for Certain Investments in Debt and Equity Securities. AFS securities are those which management does not have the positive intent and ability to hold to maturity. Securities classified AFS must be recorded at fair market value each period, with unrealized gains or losses recorded as a contra asset. AFS securities may be sold freely to generate liquidity or to rebalance the investment portfolio. |
| A measure of how long it takes, on average, for a security to repay its principal. For a Treasury note, no principal is repaid until maturity, so the average life equals the term to maturity. A sinking-fund bond or a mortgage pool, on the other hand, pays down principal at various times in its life, and in this case, average life may be significantly different from the time to final maturity. |
| The market-weighted yield to maturity of the specified portfolio. |
| Refers to a trade, quote or market which does not originate with the dealer in question, I.e., "the market is 100 1/4-1/2 away (from me)." |
| Bankers' Acceptance |
| Refers to days delayed in the receipt of redemption proceeds because the maturity date falls on a weekend or a holiday. |
| A mortgage-backed security (MBS) with periodic payments based on a 30-year amortization schedule, but with a balloon principal payment required at the end of five or seven years. |
| Unsecured and uninsured medium-term notes issued by a bank. The issuing bank does not pay a Federal Deposit Insurance Corporation (FDIC) premium on bank notes. |
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| An order to pay a specified amount of money to the holder on a specified future date. The bank that accepts this draft assumes responsibility to make payment on the draft at maturity. BAs are usually created to finance the storage or shipment of foreign or domestic goods. |
| A designation for pass-through institutions. Bankers' banks are exempt from keeping Regulation D reserves at the Federal Reserve. |
| Portfolio structuring technique using a mix of short and long-term securities to achieve a targeted average maturity or duration while gaining convexity. |
| The difference in price or yield between a futures position and the financial instrument being hedged: a difference that can change during the hedge period to produce a basis gain or a basis loss. |
| One one-hundredth of one percent. One hundred basis points equal one percent. |
| The risk that the relationship between interest rate indices alters unfavorably. |
| A market characterized by a trend of falling prices. |
| A bond presumed to be owned by its holder, who collects interest by presenting one of the detachable interest coupons to the issuer's agent or bank. |
| Pessimistic about the market; anticipating a decline in prices |
| The price at which as owner offers to sell (asked of offer) and the price at which a prospective buyer offers to purchase (bid). |
| The price a potential buyer is willing to pay for a desired security. |
| The price or discount spread between the bid and asked prices of a security. The dealer will pay the bid price or offer the security for the asked price. Thus, the bid price is lower than the asked price, with the dealer earning the bid-ask spread. Also known as bid-offer spread. |
| An instrument of debt issued by a corporation or government to raise capital. Bonds are interest bearing and promise to pay the holder a specified sum of money at its maturity plus interest at given intervals. |
| Annual yield on a short-term, non-coupon bearing security calculated in a manner that results in a yield comparable to those quoted on coupon securities. |
| Consist of two components, 1) current yield (see description below) and 2) price performance. Current Yield is the amount of coupon income received, expressed as a percentage of the current market value of the bond or portfolio. Price Performance of bonds is determined by changes in interest rates. If rates rise, bond prices fall. If rates fall, bond prices rise. |
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| The difference between the original cost or book value and the proceeds from the sale of a security if sold at a loss. |
| The value of a security as shown on the owner's balance sheet. Often much different from market value, book value is based on acquisition cost plus (minus) any unamortized (accreted) premium (discount). |
| The yield (current to maturity) of a security calculated using book value as the price. Alternatively, the yield at which a security was acquired. |
| Securities that are not represented by a paper certificate, but are maintained as computerized records at a Federal Reserve bank or other clearing center in the name of the member depository institution. The member depository institution, in turn, keeps records of the securities it owns and those being held for its customers. |
| Basis Point(s) |
| A method of analyzing investments to determine under what circumstances the returns of different securities would be equal. Commonly used in reference to the calculation of how much yield change is needed to produce identical returns among securities. |
| A broker/dealer engages in buying and selling securities both for its own account and for the accounts of others. |
| A market characterized by a trend of rising prices. |
| An issue of securities with no amortization or sinking fund features. |
| A bond whose principal is paid only on the final maturity date. |
| Optimistic about the market; anticipating a rise in prices. |
| 1. The right, but not the obligation, to purchase an asset at a predetermined price (strike price) prior to a specific date, referred to as the expiration date. Call options can be European, which allows the holder to exercise the option on the expiration date; American options which can be exercised any time prior to the expiration date; or Bermudan options, which can be exercised on specific dates prior to expiration. 2. An option contract, which for a consideration, gives the holder the right to purchase from the writer of the call a specified price, good for a specified time period. |
| The date on which a call option may be exercised. |
| The call provision describes the details by which a bond may be redeemable by the issuer in whole or in part prior to the maturity. |
| A feature of a bond whereby it may be redeemed by the issuer prior to maturity under terms designated prior to issuance because the issuer owns a call option on the bond. |
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| A feature of a floating-rate security that stipulates a maximum coupon (the cap), above which the variable coupon cannot adjust. |
| Sum of regular statutory reserves, other reserves and undivided earnings. |
| A realized gain or loss calculated at the time of sale or maturity of any capital asset or security. Refers to the profit or loss attributable to the difference between the purchase and sale prices. |
| Markets where capital funds (debt and equity) are traded. Private placements, exchanges, and organized markets are capital markets. |
| Nonresidential fixed investment in the GNP; consists of business outlays on long-lived productive facilities (plant and equipment) including office building and shopping center construction, as well as purchases of such long-lived items as trucks, office and farm equipment. |
| The cost of financing positions; the rate of interest earned from the securities held less the cost of funds borrowed to purchase them. |
| Any kind of savings account, short-term bank account, commercial paper, or other type of instrument easily converted to cash. |
| Money that the client is contributing to or withdrawing from an account during a specific period, including bank and manager fees. |
| A delivery made and settled on the day of the transaction for government securities. |
| A money-market instrument that is a receipt for funds deposited in a financial institution for a specific period of time and at a specified rate of interest |
| An entity which clears transactions for institutions that buy and sell securities. |
| The cost of funds of thrift institutions in the Federal Home Loan Bank System's 11th District (California, Arizona and Nevada). Often used as a floating rate coupon index. |
| Assets pledged to a lender until a loan is repaid. If the borrower defaults on the loan, the lender has the legal right to sell the collateral to pay off the loan. |
| Mortgage-backed pass-through security separates mortgage pools into separate classes called tranches. Interest on the outstanding principal balance of each class is paid at a specified coupon rate. Principal payments, unscheduled principal prepayments and interest are applied to each class according to a set of rules. The stated maturity of the class is the latest date on which the outstanding principal balance will be retired in full, assuming no prepayments. |
| Short-term debt obligations issued by banks, corporations, and other borrowers to investors with temporary idle cash. Commercial paper is unsecured and usually discounted, although some issues are interest-bearing. Maturities range from 1 to 365 days. |
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| Combining securities owned by a customer with those owned by its custodian. |
| A fee paid to an agent or broker for negotiating a transaction, based on a percentage of the selling price. |
| A basic product, usually agricultural or mineral, traded on a commodity exchange. Examples include petroleum products, precious metals, and grains. |
| Interest paid not only on the initial principal, but also on any interest accumulated from one period to the next. The more frequently interest is compounded, the higher the realized rate of interest. |
| A written document which confirms the previously agreed upon terms of a transaction. |
| The weekly average of the daily median of 5 primary dealers' bid-side quotations on various maturity Treasury securities. CMT is published for 3- and 6-month and 1-, 2-, 3,- 5,- 10- and 30-year maturities. Often used as a floating rate coupon index. |
| A prepayment measure for mortgage-backed securities (MBS) calculated as the arithmetically annualized percentage of the previous month's principal balance that prepays (in excess of scheduled amortization) in a given month. Example: prepaid principal in month t divided by previous month's ending principal balance, raised to the 12th power. |
| A measure of inflation. The CPI represents the market-weighted prices of a fixed basket of goods normally purchased by consumers. A measure of inflation, the CPI represents the market-weighted prices of a fixed basket of goods normally purchase by consumers and computed by the Bureau of Labor Statistics. |
| The sum of personal outlays on new (as opposed to used) goods and services other than housing. |
| A period of negative economic growth, normally measured by Gross Domestic Product (GDP). Contraction is the opposite of expansion and is synonymous with recession. |
| A residential mortgage pool with collateral mortgage issued by a bank, commercial or savings and loan association, with a fixed rate and term. Conventional mortgages are guaranteed by FNMA or FHLMC, |
| The second derivative of a bond's price change with respect to its yield, divided by its price. This number, used in conjunction with modified duration provides a more accurate approximation of the percentage price change resulting from a specified change in a bond's yield than does modified duration alone. Convexity is the price measure of how much a bond's price/yield curve deviates from a straight line (measure of the degree of curvature of the price/yield relationship). Measures the rate of change of a security's modified duration for a given change in yield. |
| Debt instrument issued by a corporation. Corporate bonds are typically taxable, have a par value of $1,000, and are traded on major exchanges or in the over the counter market. Corporate bonds are subject to default risk and are rated by a rating agency according to that risk. |
| Completion of a securities transaction at the office of the purchasing party or its receiving agent on, but not before, the third business day following the trade date. |
| The rate of interest to be paid on a bond, most often it is paid semi-annually. Refers to the interest payment of par, or face value. Expressed as a percentage of par. |
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| Bond issued with detachable coupons that must be clipped and submitted to a paying agent or the issuer for semi-annual interest payment. The holder of the coupon is entitled to the interest payment. Also known as bearer bonds. |
| An arrangement to receive cash, goods or services now and pay for them in the future. |
| An estimate of the financial health of a borrower, as well as the borrower's ability to repay principal and interest in a timely manner. |
| The possibility of loss to a lender resulting from nonpayment by a borrower. |
| The pass through coupon in the mortgage-backed securities (MBS) market trading at or nearest to, but not exceeding, par. |
| The current principal of a certificate calculated by multiplying the original face by the factor. |
| Annual interest on a bond divided by the current market value. This results in the actual income rate of return as opposed to the coupon rate. |
| A measurement of a portfolio's price sensitivity to changes in the shape of the yield curve (i.e., steepening or flattening). A portfolio's curve duration is considered positive if it has more exposure to the 2- to 10-year part of the curve. A portfolio with positive curve duration will perform well as the yield curve steepens, but will perform poorly as the yield curve flattens. A portfolio with negative curve duration has greater exposure to the 10- to 30-year portion of the curve. It will be a poor performer as the yield curve steepens and a strong performer as the yield curve flattens. |
| Security ID number assigned by the American Bankers Association's Committee on Uniform Security Identification Procedures. Each security has it own unique nine-character CUSIP. (The first six numbers identify the organization issuing the security. The next two characters identify the issue itself. The last digit is a "check digit," which is used to test for transmission and data-entry errors. The check digit contains no identification information. Note: Privately-placed issues do not have CUSIPs. Medium-term notes may or may not have CUSIPs). |
| Date from which interest is first accrued on newly issued debt instruments. |
| An order to buy or sell securities which must be executed by the end of the trading day on which it was entered, otherwise it expires. |
| Being overdrawn in a deposit account during business hours. A daylight overdraft exposes the depository institution to a potential credit risk. |
| A person or firm acting as a principal in buying and selling securities, usually compensated by the spread. |
| An obligation secured by the general credit of the issuer rather than being backed by a specific lien on property. |
| Written promise to repay a debt. Bills, notes, bonds, bankers' acceptances, certificates of deposit, debentures and commercial paper are debt instruments. |
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| A bond issued at a very low issue price. Deep discounts have low coupons offering an investor high principal return and low interest income. An extreme example is a zero coupon bond which pays all of its return in principal on the redemption date. |
| Failure to make timely payment of interest or principal on a debt security or to adhere to other provisions of a bond indenture. |
| The amount by which expenditures exceed revenues. |
| A progressive reduction in the general price level, which would make real interest rates greater than nominal rates. |
| Floating rate security whose coupon adjusts as a fraction of the change in the underlying index through use of a multiplier less than 1 in the coupon formula. For example, a coupon formula of .5 X Prime would result in a 50 basis point change in the coupon for every 100 basis point change in Prime. |
| The date on which the securities involved in a securities transaction are paid for and delivered. |
| An industry standard control ensuring the owner is always in possession of either the security or the proceeds of the transaction. With DVP, payment for the security occurs simultaneous with the delivery of the security. |
| Delivery of securities with an exchange of a signed receipt for the securities. |
| The minimum purchase amount, or multiples thereof, of a new issue when it is priced. |
| Insurance of deposits in federally-insured financial institutions up to $100,000 per account. |
| An institution which accepts securities for deposit. Deliveries and transfers between security owners are conducted by accounting entries which reflect ownership as opposed to physically moving securities. |
| A securities depository where physical stock and bond certificates are delivered and electronically transferred between members. The DTC is a member of the Federal Reserve System and is owned by most of the brokerage houses on Wall Street and the New York Stock Exchange. Securities eligible for DTC include most corporate bonds, collateralized mortgage obligations (CMOs), equities, unit investment trusts, commercial paper, certificates of deposit and municipal bonds. |
| A severe recession. |
| A contractual agreement between two counterparties, recorded off-balance sheet, calling for the exchange of cash flows on a notional principal basis. Examples of derivatives include swap agreements, futures contracts, and options contracts. As defined, derivatives are not permissible credit union investments. |
| A futures purchase or sale intended to reduce price-level risk for a deliverable financial instrument. |
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| Amount by which a bond sells below its face value. If a bond with a face value of $1,000 sells for $900, it is selling at a $100 discount. |
| A method for quoting non-coupon securities (which always sell at a discount) in which the discount from par is annualized based on a 360-day year. |
| A brokerage organization that executes orders to buy and sell securities at commission rates sharply lower than those charged by a full-service broker. |
| The adjusted margin above the index on a floating rate security. The discount margin (DM) plus the index equals the security's yield. Floating rate securities are quoted on a discount margin basis. |
| The rate of interest charged by the Federal Reserve to member institutions that borrow at the discount window. |
| Non-coupon bearing securities that are issued at a discount (less than par) and redeemed at maturity for full face value; e.g., U.S. Treasury bills. |
| The Federal Reserve facility that extends last-resort credit directly to eligible depository institutions. |
| The process of calculating the present value of a series of cash flows by dividing each cash flow by one plus an appropriate discount rate. |
| Type of account in which the broker or advisor has the authority to buy and sell securities without the client's prior knowledge of consent. |
| Consists of purchases deemed postponable rather that routine- I.e., "luxuries" vs. "necessities." |
| A slowing of the rate of growth in prices, normally resulting from a decline in the pace of economic activity. |
| Systemic trend of the withdrawal of funds from intermediary financial institutions, in order to directly access investment products offering higher returns. |
| 1. A cash or other distribution to preferred or common stockholders. 2. A share of earnings distributed to shareholders of a credit union. |
| In the case of bonds, it is the coupon rate on the bonds. In the case of stocks, it is the current annual dividend amount per share expressed in dollars. In the case of cash equivalents, it is the annualized yield. |
| The percentage obtained by dividing the dividend by the market price of a stock. |
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| Dow Jones Industrial Average |
| Also known as bounce. A term used by a receiving party when they do not recognize or agree with the details of securities that are being delivered. |
| The change in a security's dollar market value given a 1 basis point change in yield. Similar to duration, but for a very small change in yield. |
| Settlement according to the accepted market convention. |
| Depository Trust Company |
| Floating rate security whose coupon adjusts with the spread between two indices. For example, a coupon formula of 10 year CMT - 3 month LIBOR would result in a rising coupon when the spread between 10 year CMT and 3 month LIBOR widens, and a falling coupon when the spread narrows. |
| Refers to a fixed income portfolio strategy in which assets are concentrated only in the very short or very long maturity issues. |
| A measure of average maturity that incorporates a bond's yield, coupon, final maturity and call features into one measurement. Duration measures the sensitivity of a bond's, or portfolio's, price to changes in interest rates. |
| A competitive bidding technique in which the lowest price necessary to sell the entire amount of securities offered becomes the price at which all securities are sold. |
| A FNMA pass-through security backed by 15-year mortgages which have the same guarantees as regular FNMAs. |
| The percentage found by dividing the earnings per share by the market price of a stock. |
| Equivalent Bond Yield |
| The union of 12 member countries / currencies to institute an irreversible fixed exchange rate for participating countries and their replacement by a single European currency unit, the euro. |
| Statistics which suggest the direction of interest rates and the general economy. Examples are the unemployment rate, inflation rate, capacity utilization rate, and balance of trade. |
| The standard measurement that estimates the price change in a security or a portfolio when the interest rates movements are fairly small. |
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| Calculated yield on a debt instrument which uses the purchase price of the security. The effective rate is determined by the price, the coupon rate, the time between interest payments, and the time until maturity. |
| The rate of return realized by an investor who buys a security and subsequently sells it. It reflects coupon, interest on interest, principal payments and capital gains or losses in comparison to the original purchase price. |
| Ownership or proprietary rights and interests in a company. Synonymous with common stock. Investments: ownership interest possessed by shareholders in a corporation - stock as opposed to bonds. |
| A measurement of the rate of return on a security sold on a discount basis that assumes actual days to maturity and a 365-day year. |
| A bond denominated in a currency of a European country. |
| Certificate of deposit issued by a bank outside the United States, primarily Europe, with interest and principal paid in U.S. dollars. |
| Dollar denomination securities of U.S. issuers traded in foreign markets. |
| The sale of one block of bonds and the simultaneous purchase of the same principal amount of another block of bonds. |
| The relative value of one currency in terms of another. |
| The ex-dividend date determines who, from a trading perspective, receives the next dividend payment. |
| Instruments exempt from registration requirements of the Securities Act of 1933 and the margin requirements of the Securities and Exchange Act of 1934. Exempt securities include debt of the U.S. Treasury, U.S. Government agencies and municipalities, private placements, commercial paper, Title XI, and equipment trust certificates. |
| A period of increase in the rate of economic growth, normally measured by Gross Domestic Product (GDP). |
| The par value of a bond that appears on the face. This is the amount that the issuer promises to pay at maturity as well as the amount on which interest is computed. |
| The proportion of an amortizing security's outstanding principal balance to its original principal balance expressed in decimal form. |
| A trade is said to fail if on the settlement date the seller fails to deliver securities to the buyer or the buyer fails to deliver proper funds to the seller. The buyer is said to have a "fail to receive" and the seller is said to have a "fail to deliver." |
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| Refers to a pass-through security with a relatively high rate of prepayment. |
| The target rate for federal funds established by the Federal Open Market Committee (FOMC) |
| Also known as agencies, these securities are issued by government agencies such as the Government National Mortgage Association (GNMA) or government sponsored enterprises (GSE) such as the Federal Home Loan Bank System. |
| Government-sponsored institution which specializes in the consolidation of the financing activities of the Federal Land Banks, the Federal Intermediate Credit Banks, and Banks for Cooperatives. The FFCB issues bonds and notes on a regular basis to provide funds to members of the Federal Farm Credit System. |
| A government institution established in 1973 to lend small government agencies reasonably priced funds. The fact that these small agencies were relatively unknown and were forced to compete with the issuances of the Treasury and larger agencies gave rise to the Federal Financing Bank. |
| Deposit balances at the Federal Reserve, most of which represent legal reserves. Transactions that involve the sale of immediately available funds for one business day are "Federal Funds" transactions. |
| The interest rate at which federal funds are traded. It is monitored by the Fed in the process of regulating the growth of bank reserves and money supply in the execution of its monetary policy. As such, it is closely watched by market participants. |
| The FHLB, created in 1932, was composed of 12 regional banks and a central board in Washington, D.C. The 12 Federal Home Loan Banks issue consolidated debt securities to provide liquidity to member financial institutions. The 1989 Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) changed the structure of this system by changing the requirements for FHLB membership. No longer responsible for regulating or examining its members, the FHLB is now under the supervision of the Federal Housing Finance Board (FHFB). |
| A government organization that purchases mortgages from thrift institutions to increase the supply of housing funds. |
| The FHA is a federally sponsored agency created in 1934 under the National Housing Act to insure lenders against loss on residential mortgages. |
| The Finance Board oversees the 12 Federal Home Loan Banks and the Office of Finance. It ensures the safety and soundness of the bank system, establishes policy for the Community Investment Cash Advances program, and the Community Support Program. It also oversees the FHLB's financial performance and operations, and evaluates banks' achievements of public policy. |
| One of 12 district banks which provides short-term financing for the seasonal production and marketing of crops and livestock and for other farm-related credit purposes. These banks do not lend directly to farmers. Instead, they lend to various financial institutions which make loans to farmers. |
| One of 12 district banks which extends first mortgage loans on farm properties and makes other loans through local Federal Land Bank associations. |
| The FNMA, also known as Fannie Mae, was established in 1938 by Congress to create a secondary market in mortgages issued by the Federal Housing Administration (FHA). Currently, FNMA is a privately owned corporation whose function is to buy and sell government insured or guaranteed mortgages to stabilize the supply and demand of mortgage money. Fannie Mae issues debentures and short-term discount notes to finance its mortgage purchases. FNMA guarantees timely payment of principal and interest on MBS it issues. |
| A committee consisting of the 7 members of the Federal Reserve Board of Governors plus 5 of the 12 presidents of the Federal Reserve Banks. The FOMC meets once every 7 weeks to establish the prevailing discount and Fed Funds target rates. The FOMC also conducts open market operations, whereby government securities are bought and sold in the open market to implement monetary policy. |
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| One of the 12 banks that, with their branches, make up the Federal Reserve System. The role of each Federal Reserve Bank is to monitor the commercial and savings banks in its region, to ensure that they follow Federal Reserve Board regulations, and provide access to funds through the discount window. |
| The Fed's arm for establishing and executing monetary policy. This committee is composed of the seven Governors of the Federal Reserve Board, the president of the Federal Reserve Bank of New York and four of the presidents of regional Federal Reserve Banks. It normally meets on the third Tuesday of each month to issue guidelines to its trading desk at the Federal Reserve Bank of New York. A summary report of each meeting is released the Friday after the subsequent meeting. |
| All of the Fed's activities in the marketplace. When the Fed is a buyer of securities, the quantity of bank reserves is increased. When the Fed sells securities, banks lose reserves. The purpose of most open market operations is merely to offset changes in the quantity of bank reserves arising from other factors, most notably changes in the Treasury's balance at the Federal Reserve. |
| Established in 1913, it is the central banking system of the U.S. There are 12 regional Federal Reserve Banks but virtually all the policy-making powers are lodged in the Board of Governors of the Federal Reserve System in Washington. This has seven members appointed by the President of the U.S. for 14-year terms. The president chooses one of these to be chairman for a 4-year term. All depository institutions must hold reserves at the Fed or in vault cash. |
| Federal Housing Authority |
| Stands for Federal Home Loan Bank. One of the federal agencies that guarantees mortgages for home loans. |
| Stands for Federal Home Loan Mortgage Corporation, another federal agency guaranteeing home mortgages. Freddie Mac. |
| A program of FHLMC mortgage-backed securities (MBS) issuance. Under the "Gold" program, FHLMC guarantees timely payment of principal and interest. The payment delay on FHLMC "Golds" is 45 days. All FHLMC MBS issued since 1991 are issued under the "Gold" program. |
| A program of FHLMC mortgage-backed securities (MBS) issuance. Under the "Green" program, FHLMC guarantees timely payment of principal and eventual payment of interest in the event of delinquency or default on the underlying mortgages. The payment delay on FHLMC "Greens" is 75 days. |
| An individual, corporation, or association, to whom certain property is given to hold in trust, according to the trust agreement under which the property is held. |
| The first date after settlement on which a coupon is paid to the buyer. |
| Federal Government policies affecting government spending, taxation, and deficits (or surpluses). |
| The NASD guide in establishment of mark-ups and commissions. As a practice, dealer mark-ups and commissions on a security should not exceed 5% of the price of such security. |
| Securities/Investments in which the income during ownership is fixed or constant. Generally refers to any type of bond investment. |
| A debt instrument that carries a fixed coupon. |
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| A mortgage which features a fixed rate of interest and a level monthly payment that remains constant over the life of the mortgage. |
| A security trades flat when it is traded with no accrued interest. For example, if a security transaction has a settlement date equal to the security's interest payment date, the buyer will not pay the seller accrued interest. |
| To sell securities shortly after purchase for a trading profit. |
| A fixed income security which has variable coupon rates, periodically changed according to the rise and fall of a certain interest rate index or a specific fixed income security which is used as a benchmark. Also known as a "floater". |
| A feature of a floating rate security that stipulates a minimum coupon (the floor) below which the coupon cannot adjust. |
| Stands for Federal National Mortgage Association or "Fannie Mae". This publicly owned government sponsored corporation backs mortgage loans, which are packaged together and sold to investors as "FNMAs". |
| Federal Reserve Open Market Committee (or FOMC) |
| An account at a financial institution which is held in currency other than U.S. dollars. |
| Market where currencies are traded internationally. The foreign exchange market represents transactions equaling approximately a trillion dollars globally every day, which is greater than all bond markets combined. |
| A forward trade is a principal-to-principal non-transferable agreement which stipulates that delivery and payment for securities will take place on a date in the future at a price agreed to at the time of the transaction. |
| Delivery of securities with no required payment by the receiving party. Free delivery is not permitted for federal credit unions. |
| Number of coupon installments paid annually. Zero-coupon bonds, which pay no coupons, have frequencies of zero. Corporate bonds typically pay interest twice a year (semi-annually). CMOs pay interest either monthly or quarterly, while mortgage pools pay once a month. Eurobonds often pay annually. |
| The security holder receives principal and interest due, whether or not they have been collected. |
| A contract to buy or sell a specific amount of securities or commodities for a specific amount of securities or commodities for a specific price or yield on a specified future date. |
| The assumed amount of cash at a future point in time. a present value becomes a future value through the process of reinvestment. |
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| Agreement to buy or sell a specific amount of a commodity or financial instrument at a particular price and a stipulated future date. (exchange traded) |
| The process of meeting an obligation to deliver or receive securities or commodities on a date, in a location as specified by the terms of the contract. |
| Refers to aggregate market value positions in financial futures contracts either held for future delivery into account (Futures Long) or the future delivery of financial instruments from account (Futures Short). |
| The difference in maturity between an institution's sources and uses of funds. |
| Process of managing the difference between the sources and uses of funds and the effect of interest-rate sensitivity and liquidity on that difference. |
| A federal tax-exempt bond backed by the "full faith, credit and taxing power" of the issuing municipality. |
| Give up of yield results from the sale of bonds at one yield and the purchase of an equivalent amount of bonds at a lower yield. |
| Stands for Government National Mortgage Association or "Ginnie Mae". This is a federal agency which backs home loan mortgages. A wholly-owned U.S. Government cooperation within the Department of Housing and Urban Development, established in 1968 as a spin-off from the Federal National Mortgage Association (FNMA). GNMA took over the assets and liabilities and operations of the Special Assistance Functions and the Management and Liquidating functions of FNMA. GNMA can raise funds by issuing securities backed by pools of mortgages. Primary functions of GNMA are the purchase and sale of certain FHA and VA mortgages pursuant to various programs for support of the housing market, and the guaranteeing of mortgage-backed securities issued against pools of FHA and VA mortgages. |
| The completion of a security transaction that meets the specifications of the confirmation. The security must be delivered within the agreed upon time period and must be properly endorsed if necessary. |
| A cash deposit required on a competitive bid. Deposits usually range from one to five percent of the value of an issue, and are due at the time of the bid. |
| An open order to buy or sell securities which remains in effect until the order is executed or canceled. |
| A security issued by the U.S federal government and its agencies (all are U.S. Treasury obligations). |
| Obligations of the federal government other than direct obligations such as Treasury Notes, Bonds, or Bills. Examples of these are GNMAs, FHLMCs, etc. |
| Bonds backed by the federal government, whether issued by the Treasury or one of the government agencies. |
| A mortgage which calls for monthly payments that are initially relatively small and which rise by a fixed percentage each year for some specified period of time. |
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| The standard measure of growth in economic activity. GDP measures the gross domestic output of an economy. Two consecutive quarters of decline in the growth rate of real GDP is considered a recession. |
| The total dollar value of final goods and services produced by the economy. When the proper accounting adjustments are made, this is equivalent to adding up total income and taxes in the economy; or total final sales plus the change in inventory stock; or the total value of each industry's output. Real GNP is the figure derived by deflating each component of GNP for the increase in prices since an arbitrary base period (currently 1972) and adding up the results. The relationship between this total and the actual dollar GNP yields the implicit GNP price deflator that is commonly cited as a measure of general price change. |
| The dollar difference between the price which the issuing company receives for its securities and the price which the public pays for those securities. The sum of the selling concession, management fee and the underwriting fee equals the gross spread. |
| In the GNMA forward market, a trade in which the seller guarantees the buyer delivery of a specific-coupon GNMA at the agreed price, thereby avoiding the yield maintenance and par cap procedures associated with delivery of different coupons. |
| A bond issued by FHLMC backed by a pool of conventional mortgages and similar to a pass-through except that FHLMC guarantees that some minimum principal amount will be paid each year. Unlike pass-throughs GMC's pay interest semi-annually and principal annually. The investor also has the option to put his remaining principal balance to FHLMC at par some time prior to maturity. |
| The difference between the actual market value of a security and its loan value. A haircut is taken by the purchasing party in a reverse repurchase or repurchase transaction to protect the buyer from becoming under-collateralized should market prices decline. Also called margin or over-collateralization. |
| The amount of time that must elapse until half the principal amount of a block of bonds has been retired ( via a sinking fund or other Process). |
| The whole-dollar price of a security. For example, if a security is quoted at 101-10/32, 101 is the handle. |
| Accounting classification under Statement of Financial Accounting Standards (SFAS) 115, Accounting for Certain Investments in Debt and Equity Securities. HTM securities are those which management has the positive intent and ability to hold to maturity. Securities classified HTM must be recorded at amortized cost. HTM securities may not be sold except under certain circumstances. Changes in market interest rates, generating liquidity, or rebalancing the investment portfolio are not acceptable reasons for the sale of HTM securities. |
| Owner of a security as recorded on the books of the issuing company or its transfer agent as of the record date. |
| A process for designing fixed income portfolios to obtain a target rate of return over a specified time period, within a narrow range, despite market conditions. |
| A forecasted rate derived from present yields and based on the theory that the yield curve on one day is an excellent prediction of rates in the future. |
| Money earned on a security from interest or dividends. |
| For debt securities, the contract that specifies all legal obligations of the issuer with respect to the securities and any qualifications or restrictions that may exist. The indenture names a trustee which holds the indenture, supervises payments of principal and interest to the security holders, and acts on behalf of the holders in the event of a default or other violation of the indenture's provisions. |
| 1. A short-term money market rate used as the coupon basis for a floating rate security. Examples, which are generally published in financial media, include the Prime rate and LIBOR. 2. A statistical yardstick composed of a basket of securities with a set of characteristics. An example of this would include the S&P 500 which is an index of 500 stocks or the Lehman Aggregate for bonds. |
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| An account comprised of securities; the characteristics of which will produce a return which will replicate a designated securities index. (i.e., Stocksplus and S&P 500) |
| A bond whose coupon payments are a function of some index. |
| A quote that is indicative of the market at a particular time of the day. Foreign exchange rates are subject to change, and the indicative quote will give the member a good estimate of the real-time exchange rate that your corporate will receive. |
| An index of economic growth based on the production activity of manufacturing firms. |
| A general rise in prices, usually measured by changes in prices of major indices, such as the Consumer Price Index. An increase in a particular price may or may not be inflationary, depending on how it affects other prices and on how promptly it brings to market additional supplies of a product. As of December 2001, the year-over-year percentage change in the CPI was 1.9%, which in historical terms is a modest rate of inflation. |
| Fixed income securities whose principal value is periodically adjusted according to the rate of inflation. The interest rate on these bonds is fixed at issuance, but over the life of the bond this interest is paid on an increasing principal value, which has been adjusted for inflation. |
| The amount of margin required in order to establish a position in a futures contract. |
| The market defined by the highest actual bid and the lowest actual offering. An inside market may be tighter than a particular trader's market. |
| The bid and offer rates at which international banks place deposits with each other. These are rates based on transactions of $1 million to $5 million or more transferred electronically. |
| The interest portion of a stripped mortgage-backed security or an interest-only tranche of a CMO. All interest payments on the underlying mortgages are due to registered holders of the IO security. If the mortgages prepay faster than expected, the buyer may receive less in cash flows than the amount paid. |
| The percentage increase in the value of a bond over the holding period that results from interest income, including: All coupon payments; All income earned by reinvesting coupon payments and proceeds, if any, from selling or redeeming the bond; Any change in accrued interest between the settlement date and the horizon date. |
| The percentage paid as a fee for the use of money, expressed as an annual percentage of the principal amount. Influenced by a variety of factors including economic growth, inflation, supply/demand and international factors. |
| Interest income impacts the portfolio as soon as it is earned. Income is posted to cash automatically on payment date except in the case of mortgage a pass-through, where we post based on actual bank receipts. |
| A measurement of the rate of return on a security sold on a discount basis that assumes actual days to maturity and a 360-day year. |
| When interest rates rise, the market value of fixed-income securities (such as bonds) declines. Similarly, when interest rates decline, the market value of fixed-income securities increases. |
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| Swaps done in anticipation of a (favorable) change in the price or yield spread between the two issues from two different sectors of the market. |
| The settlement of securities is affected through an international clearing agency such as Euroclear or Cedel. International settlement usually assumes no local or generally recognized holidays |
| A floating rate security whose coupon rises (falls) as the index to which it is tied falls (rises). |
| Legislation passed by Congress to insure that those investing in investment companies are fully informed and fairly treated. It requires that all publicly held companies register with the SEC. |
| An individual or firm engaged in the financing of capital. The investment banker is the middleman between the issuer of new securities and the investor. He/she facilitates the conversion of savings into investment. |
| Bonds rated in the top four rating categories (AAA, AA, A, BBB) are commonly known as investment grade securities and are considered eligible for bank investment under present commercial bank regulations issued by Comptroller of the Currency. |
| A standard yield to maturity calculation recommended by the ISMA (formerly AIBD). Yield is compounded annually regardless of the coupon frequency. |
| A bid to purchase securities at the initial offering price. |
| The date on which a security is issued and becomes available for settlement. |
| The dollar value of a security when it first comes to the market. Issue prices are determined in three ways: by auction, as for Treasuries, by consensus, as in a private placement, and by the lead underwriter, who sets the yield. |
| Par or face amount of a security issued by a corporation, often stated in millions of dollars. |
| Any entity that has the legal authority to issue and distribute a security. Examples of issuers include corporations, municipalities, foreign and domestic governments and their agencies, and investment trusts. |
| Certificate with a minimum face value of $100,000. Jumbo CDS are usually bought and sold by large banks, pension funds, money market funds, and insurance companies. Principal in excess of $100,000 is uninsured. |
| A mortgage in excess of the maximum amount allowed for pooling by FNMA and FHLMC. |
| A bond claimed to have high yield, a low investment quality and credit worthiness, usually with a rating of BB or less. |
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| A fixed income portfolio strategy in which assets are distributed evenly over a range of maturities. |
| The date on which the last coupon is paid prior to settlement. Although the issuer may pay a final coupon at settlement, that coupon is not considered the last coupon. |
| An index consisting of 11 component measures of economic activity. The LEI is considered to be a useful measure in forecasting economic peaks and troughs. |
| Those economic statistics that in the past have turned up or down in advance of the general business situation. The Leading Indicator Index is a composite of several such series. There are also Coincidental Indicators (that move with the situation) and Lagging Indicators ( that move after the situation). |
| The legal status of a bond generally used to indicate whether it is a legal investment for savings banks in Connecticut, Massachusetts, New Hampshire, New Jersey and/or New York. Also called Legal Status. |
| 1.Borrowing funds to invest in securities, thereby increasing the potential return or loss on the funds actually placed at risk, or 2. increasing exposure to an index or other factor by making the security return dependent upon a multiple of the change in the index or other factor. |
| The maximum daily price change of a futures contract above or below the previous day's settlement price. |
| An order to buy or sell at a specific price or better. |
| The ability to convert assets easily and rapidly into cash. Alternatively, short-term funds (cash and equivalents) held to meet immediate cash demands, such as deposit withdrawals or loan demand. |
| The extent to which yields are lower on more liquid securities due to the relative ease with which such securities can be bought or sold in the secondary market. |
| The risk that an issue will be illiquid and force an investor to take a loss if he attempts to sell the issue prior to maturity. |
| The relationship between the amount of a mortgage loan and the appraised value of the property, expressed as a percentage of the appraisal value. |
| The posted rate at which prime banks offer to make Eurodollar deposits available to other prime banks for a given maturity which can range from overnight to five years. |
| Signifies an ownership position of a security. |
| The most recently issued 30-year Treasury bond. Because the yield on the long bond will fluctuate in reaction to economic information, it is used as a benchmark in monitoring long-term interest rates. |
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| The first interest payment covering a longer period than the remaining payments. A long coupon results when a bond is issued more than 6 months before the first scheduled payment date. |
| The difference between the market value of collateral pledged to secure a loan and the face value of the loan itself. |
| A call for cash in a margin position. |
| A day when the domestic bond market is open. |
| An order given to buy or sell a particular security at the best immediately obtainable price. |
| The most current price of a security. |
| The risk that current interest rates may change and thus adversely affect current market prices. |
| Market price times quantity. |
| Securities that may be sold easily due to an active secondary market; e.g., government securities, bankers' acceptances, and commercial paper. |
| The process of adjusting a security's price to fair market value each period. Marking-to-market results in unrealized gains when the market price increases above historical cost, or unrealized losses when the market price falls below historical cost. |
| If the distribution of the maturities of a financial institution's deposits equals that of its investments, it is said to have a matched book. Also known as an immunized portfolio or a dedicated portfolio. |
| The date on which a loan, bond, mortgage or other debt security becomes due and is to be paid off. |
| A book-entry depository for GNMA securities initially operated by Mortgage-Backed Securities Clearing Corporation (MBSCC). On March 31, 1989, the Participants Trust Company (PTC) completed its purchase of the depository from the MBSCC. |
| The theoretical framework for designing investment portfolios based upon the risk and reward characteristics of the entire portfolio, which is held not to be equivalent to the aggregation of the individual securities of the portfolio due to the covariance of returns of the individual assets. The major tenet of the theory holds that reward is directly related to risk, which can be divided into two basic parts: 1) systematic risk (portfolios' behavior as a function of the market's behavior), and 2) unsystematic risk (portfolios' behavior attributable to selection of individual securities). Because un-systematic risk can be largely eliminated through diversification, the portfolio will be subject principally to systematic risk. |
| The security holder receives interest due, whether or not it has been collected, and principal as collected. |
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| Market in which short-term debt instruments are traded. These instruments primarily include certificates of deposit, Eurodollar certificates of deposit, commercial paper, bankers' acceptances, Treasury bills, and discount notes of government-sponsored enterprises. Federal Funds borrowing, bank borrowing from the Federal Reserve, and various forms of repurchase agreements are also elements of the money market. |
| Insured deposit accounts of very short maturity with rates determined by the market and accessible by withdrawal instrument. MMAs are limited to three share draft or check withdrawals per month, and a total of six remote withdrawals per month to avoid posting reserves. |
| A taxable, uninsured investment account with no set maturity date, but invested in securities of very short maturity with rates determined by the market and accessible by withdrawal instrument. Subject to 2(a)7 of the Securities and Exchange Act of 1934. |
| A conveyance of an interest in real property given as security for the payment of a debt. |
| A bond backed by a lien against real property. |
| A security whose cash flows are derived from underlying mortgages. I/Os and P/Os are examples of mortgage derivatives. |
| A type of term life insurance often bought by mortgagors. The amount of coverage decreases as the mortgage balance declines. In the event that the borrower dies while the policy is in force, the debt is automatically repaid by insurance proceeds. |
| A mortgage-backed security, backed by residential mortgages, in which each resident's monthly mortgage payments, plus any optional prepayments, are passed through to the investors. A service fee is deducted from each pass-through payment. |
| Mortgages sharing similar characteristics in terms of class of property, interest rate, and maturity which have been grouped together for the purpose of issuing new securities. |
| Entity which lends stockholder capital to real estate builders and buyers. Funds are often borrowed from banks and then lent at higher interest rates to companies dealing in real estate. REITS typically invest in real estate properties and/or mortgage-backed securities. |
| A general obligation of the issuer, secured by mortgage collateral, where the issuer retains ownership of the mortgages. Unlike pass-through securities, the cash flow on a mortgage-backed bond is not directly related to the cash flow of the underlying mortgage collateral. Interest on the bond is paid semi-annually at a fixed rate and principal is paid at maturity. |
| Security backed by mortgages issued by private issuers, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, or the Government National Mortgage Association. Investors' cash flow are based on the interest and principal payments made on the underlying mortgages. |
| Structured note whose initial coupon steps up to subsequently higher pre-determined coupons if the note is not called. |
| A debenture issued by a municipality. Interest on municipal bonds (munis) is exempt from federal and may be exempt from state and local, income tax. |
| An investment company whose capitalization is not fixed at a given number of shares but that issues shares in accordance with customer demand. Mutual funds sell their own new shares to investors, stand ready to buy back their old shares, and are not listed on organized exchanges. Mutual funds are often classified on the basis of the kinds of investment they specialize in, such as bond funds, ARM funds, or money market funds. The price for a share of a mutual fund is determined by the trust?s net asset value (NAV) per share. |
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| Formed in 1939 under the auspices of the Maloney Act, it is a self-regulating body of the securities industry designated to establish rules of fair practice for the protection of the investing public. |
| Owned and operated by the National Association of Securities Dealers, NASDAQ is a computerized system that provides brokers and dealers with price quotations for over-the-counter and listed securities. |
| The process which occurs when payments on a graduated payment mortgage or an adjustable-rate mortgage are insufficient to pay the interest due on the loan balance. The unpaid interest is added to the principal increasing the balance owed by the borrower. Adjustable rate mortgages with payment caps (as opposed to interest rate caps) may feature negative amortization. |
| Claims or rights to payment that are readily transferable from one party to another, i.e., capable of being bought and sold. |
| The price for a share of a mutual fund. The net asset value (NAV) is the total market value of all the fund's securities, minus liabilities, divided by the number of shares outstanding. |
| The homeowners' gross interest payments minus servicing, management, and guarantee fees. Investors receive the net coupon cash-flows. For ARM pools, the net coupon is the net margin plus the floating-rate index rate as of the last reset date. |
| A calculation to determine the risk that changing interest rates will place on a corporate's capital. NEV is intended to show how the economic values of both sides of the balance sheet will change in relation to one another as interest rates change. |
| A stock or bond sold by a corporation for the first time. Proceeds may be said to retire outstanding debt, for new plants or equipment, or for additional working capital. |
| Any calendar day without regard to whether the bond market is open or not. |
| The dates on which coupons are scheduled to be paid. This day is used to calculate the accrued interest due to the holder. If the nominal payment date falls on a non-market day, the actual coupon payment is usually on the next market day. Also referred to as coupon date or coupon due date. |
| Annual dollar amount of income received from a fixed-income security divided by the par value of the security and stated as a percentage. A security's nominal yield is equal to its coupon rate. |
| Securities are registered in nominee name for reasons of safety or to facilitate transactions. Nominees pass through principal and interest payments to the beneficial owner who retains the right to the security and its benefits. Also referred to as street name. |
| A basis for exchange of cash flows used in derivatives markets. The dollar amount of cash flows to be exchanged is calculated by multiplying an index or price factor by a notional principal balance, but the principal is not exchanged. |
| New York Stock Exchange |
| Refers to a trading unit of a bond that is some fraction of a round-lot. A premium is usually charged for odd-lot transactions. |
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| Price at which the owner of a security will sell; also known as the ask, asked, or asking price. |
| A set of securities that a trader or portfolio manager wants to buy or sell. |
| A legal document explaining the terms of a security exempt from registration (e.g., agency securities). An OC is delivered to investors within 30-90 days of delivery of a new issue of the security. |
| The most recently auctioned Treasury security of a given maturity. |
| An order to buy or sell entered at a certain price and designated good until canceled. |
| Repurchase agreement in which the repurchase date is unspecified and the agreement can be terminated by either party at any time. The agreement continues on a day-to-day basis with interest rate adjustments made as market rates change. |
| A contract between two counterparties whereby the seller grants an option to buy or sell the underlying commodity or security at a given price on or prior to the contract's expiration date. |
| Centralized institutions on which listed securities are traded. Prices are determined by forces of supply and demand. The New York Stock exchange and the American Stock Exchange are organized exchanges. |
| The face value of a security on the issue date. |
| The discount from par at which a new issue comes to the market. The IRS treats the accretion of this discount over the life of the security as being current income to the holder. |
| The principal amount of a pass-through pool originally issued (also called original face). |
| A person who solicits builders, brokers, and others to obtain applications for mortgage loans. Origination is the process by which the mortgage banker brings into being a mortgage secured by real property. |
| A market that is susceptibl |
